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Annual Procurement Law Reforms in the FY 2019 National Defense Authorization Act

Government Contracts Update

Date: August 22, 2018

Key Notes:

The FY 2019 NDAA contains far-reaching reforms to procurement laws in Title VIII, which covers acquisition policy and management.

We summarize here a select number of reform provisions contained in Title VIII, which include increased congressional attention to the DoD industrial base, small business contracting and countering risks from competitor nations.

The NDAA contains additional procurement-related reforms outside Title VIII, including extensive provisions on space and cyberspace, and limiting foreign access to U.S. technology.

Overview

As we reported in a previous update, the John S. McCain National Defense Authorization Act (NDAA) for Fiscal Year 2019 was signed into law by President Trump on August 13, 2018. The FY 2019 NDAA authorizes about $717 billion in appropriations for the Department of Defense (DoD) and other agencies. The Congressional Research Service (CRS) has published a brief overview of major procurements and policy highlights. Summaries of the conference report are available from both the Senate Committee on Armed Services and the House Committee on Armed Services. The enrolled bill is available online, as is a press release from DoD, issued following the signing ceremony at Ft. Drum, NY.

Each year, the NDAA includes reforms to procurement policies, priorities and laws. The FY 2019 NDAA contains far-reaching reforms to procurement laws in Title VIII, which covers acquisition policy and management. We previously summarized significant provisions relating to laws that govern commercial item procurements and a reorganization of the U.S. Code. We summarize further below a diverse array of additional reform provisions contained in Title VIII.

Although we focus here on Title VIII, there are significant procurement-related provisions throughout the FY 2019 NDAA. For example, the NDAA establishes a unified U.S. Space Command and directs DoD to develop a plan to establish a “separate, alternative” process for space-related acquisitions. The NDAA also includes extensive provisions on cyber policy and operations, strengthens DoD cybersecurity programs and authorities, and prioritizes the readiness of the U.S. Cyber Command. Provisions relating to space activities and cyberspace matters are located in Title XVI—Strategic Programs, Cyber, and Intelligence Matters.

As noted in the House conference summary, the NDAA also addresses competitor nations’ advances in emerging technologies, “including artificial intelligence, quantum sciences, space and counter-space capabilities, cyber, influence operations, and hypersonics, among others.” As stated in the Senate summary, “the legislation increases R&D [research & development] spending by over $600 million, the majority of which is for science and technology spending with an emphasis on high priority emerging technologies.”

In addition, the FY 2019 NDAA includes provisions “designed to limit foreign access to sensitive U.S. technology, including the Foreign Investment Risk Review Modernization Act of 2018, which expands the purview of the Committee on Foreign Investment in the United States (CFIUS) to address national security concerns; and the Export Controls Act of 2018, which controls the export of certain ‘dual-use’ and military items,” as stated by CRS. These provisions are located in NDAA Title XVII—Review of Foreign Investment and Export Controls, and provide additional context for certain procurement-related provisions in Title VIII.

Although the NDAA’s top-line authorization reflects increased spending on DoD and its procurements, the NDAA also requires improved efficiencies. As noted by CRS, NDAA Section 921 requires the DoD Chief Management Officer “to certify savings of least 25% by FY2020 from the business operations of defense agencies and field activities responsible for logistics, human resources, and other functions—which are sometimes referred to as the Pentagon’s Fourth Estate.” Several provisions in Title VIII are also related to services contracts and reflect Congress’ focus on improving the efficiency of DoD services contracting. Below is a summary of 15 select provisions of Title VIII.

NDAA Title VIII, Subtitle B includes amendments to general contracting authorities, including single source task or delivery order contracts and waivers of the requirement for certified cost or pricing data. We summarize here provisions concerning the micro-purchase threshold, DoD services contracts and past performance evaluations.

Both the House bill and the Senate version contained similar provisions, resulting in Section 821 of the NDAA, which amends 10 U.S.C. § 2338 by raising the micro-purchase threshold for the DoD from $5,000 to $10,000, consistent with the current level for civilian agencies.

This provision amends the requirement adopted in the FY 2018 NDAA for “Improvement of Planning for Acquisition of Services,” codified at 10 U.S.C. § 2329, which requires annual submissions by the Secretary of Defense to Congress, at or about the time of the annual budget submission, concerning budgeting for services contracts. The Secretary must submit “information on services contracts that clearly and separately identifies the amount requested for each category of services to be procured for each Defense Agency, [DoD] Field Activity, command, or military installation.” This provision reflects continued scrutiny from Congress on the extent of DoD services contracting.

The House bill would have amended the requirement by moving up the effective date two years from 2022 to 2020. The Senate version contained a similar provision “that would require the Under Secretary of Defense for Acquisition and Sustainment to brief the congressional defense committees not later than 180 days after the [NDAA’s enactment], and every 180 days thereafter,” on DoD’s progress towards meeting the requirements.

The final NDAA § 818 amends the deadline by one year to October 1, 2021, and includes the required briefings by the Under Secretary of Defense to the congressional defense committees. The net result will be consistent with increased congressional scrutiny on the nature and scope of services contracting throughout DoD, reflected in this and other provisions of the NDAA, including § 819 (data collection and inventory for services contracts) and § 820, discussed below, concerning relevant definitions for services contracts.

The House bill contained a provision that would have directed the Secretary of Defense to revise the Defense Federal Acquisition Regulation Supplement (DFARS) to clarify terms related to services contracts, including the appropriate use of personal and nonpersonal services contracts.

The Senate conference amendment and final NDAA instead only require the Secretary of Defense to submit a report on DoD services contracting to the congressional defense committees no later than 180 days after the NDAA’s enactment. The report will clarify terms used by the DoD related to services contracting, “including the appropriate use of personal services contracts and nonpersonal services contracts, and the responsibilities of individuals in the acquisition workforce with respect to such contracts.” NDAA § 820 follows various similar recommendations advanced in the Section 809 Panel’s Volume 1 and 2 Reports.

The Senate version contained a provision that required the Secretary of Defense, in consultation with the FAR Council and the Administrator for Federal Procurement Policy, to develop, within 180 days after the NDAA’s enactment, policies to ensure that the best information is available regarding past performance of certain subcontractors and joint venture partners during competitions for contract awards. The House conference amendment and final NDAA limit these subcontractor/partner evaluations to military construction contracts, as reflected in NDAA § 823.

Industrial Base Matters (Title VIII, Subtitle E)

Title VIII, Subtitle E includes a number of provisions relating to the DoD industrial base. We summarize select provisions below concerning defense manufacturing communities, the electronics industrial base and machine-vision technologies.

Support for Defense Manufacturing Communities to Support the Defense Industrial Base (NDAA § 846)

The Secretary of Defense may establish within the DoD a program “to make long-term investments in critical skills, facilities, research and development, and small business support in order to strengthen the national security innovation base by designating and supporting consortiums as defense manufacturing communities.” The Secretary must coordinate with the Secretary of Commerce and the defense manufacturing institutes to implement this “Defense Manufacturing Community Support Program.”

Under the program, the Secretary may award financial or technical assistance to a member of a consortium designated as a defense manufacturing community. In turn, a recipient of financial or technical assistance under the program may use this assistance to support an investment that will improve the defense industrial base. The Secretary may designate eligible consortia as defense manufacturing communities through a competitive process.

Report on Defense Electronics Industrial Base (NDAA § 845)

This provision reflects the critical importance of the electronics industry to DoD and U.S. defense capabilities, and to the congressional priorities of cybersecurity and supply chain risk management. The Secretary of Defense must submit to Congress a report, not later than January 31, 2019, “examining the health of the defense electronics industrial base, including analog and passive electronic parts, substrates, printed boards, assemblies, connectors, cabling, and related areas, both domestically and within the national technology and industrial base.”

Pilot Program to Test Machine-Vision Technologies to Determine the Authenticity and Security of Microelectronic Parts in Weapon Systems (NDAA § 843)

This DoD pilot program should spur development and increased application of machine-vision technologies, which provide imaging-based automatic inspection and analysis capabilities. Under this section, the Under Secretary of Defense for Research and Engineering, in coordination with the Defense Microelectronics Activity, is authorized to establish a pilot program to test the feasibility and reliability of using machine-vision technologies to determine the authenticity and security of microelectronic parts in weapon systems. The DoD may consult with manufacturers, industry associations, machine vision companies and federal laboratories.

Small Business Matters (Title VIII, Subtitle F)

Title VIII, Subtitle F includes a dozen sections on various small business matters. These include diverse subjects ranging from amendments to the Small Business Innovation Research program, to funding for the procurement technical assistance program, and assistance for Puerto Rico small businesses. Section 851 in particular signifies a congressional priority for small business contracting with DoD, and should improve contracting opportunities for small businesses.

DoD Small Business Strategy (NDAA § 851)

Under § 851, the Secretary of Defense must implement a new small business strategy for DoD no later than 180 days following the NDAA’s enactment. As part of the small business strategy, the Secretary must ensure that there is a unified management structure within the DoD for its functions relating to (1) programs and activities related to small business concerns; (2) manufacturing and industrial base policy; and (3) any procurement technical assistance program.

The Secretary must ensure that programs and activities of the DoD related to small business concerns “are carried out so as to further national defense programs and priorities and the statements of purpose for [DoD] acquisition set forth in section 801 of the [FY 2018 NDAA].” The Secretary must further ensure: “(1) that opportunities for small business concerns to contract with the Department of Defense are identified clearly; and (2) that small business concerns are able to have access to program managers, contracting officers, and other persons using the products or services of such concern to the extent necessary to inform such persons of emerging and existing capabilities of such concerns.”

The Secretary must transmit the small business strategy to Congress and publish it on a public DoD website. Small business concerns stand to benefit under this provision, with better information and increased opportunities to contract with DoD. The conference report noted that a “unified strategy would create expanded small business engagement in the defense sector by increasing entry points for nontraditional and innovative companies.”

Other Matters (Title VIII, Subtitle H)

Title VIII, Subtitle H contains 20 sections on a variety of topics including procurement reforms, such as promotion of interagency contracts and increasing competition at the task order level, pilot programs, required studies and reports, and several provisions to counter foreign threats and risks, such as a prohibition on acquisition of sensitive materials from non-allied foreign nations. We summarize select provisions below concerning OTAs, LPTA evaluations, supply chain risk, market research, foreign access to technology, and a pilot program to reduce requirements for cost or pricing data.

Data, Policy, and Reporting on the Use of Other Transactions (NDAA § 873)

This provision reflects congressional attention to the increasing reliance and expenditures by DoD on its expanded use of other transaction authorities (OTAs) provided by Congress in recent years. The Secretary of Defense is required to submit a report to Congress, covering the preceding fiscal year, on the DoD’s use of OTAs, not later than December 31, 2018, and each year thereafter through 2021. The DoD must collect data on the use of other transactions by the Defense departments and agencies, and the Assistant Secretary of Defense for Acquisition is required to analyze and leverage the data collected, to update policy and guidance related to the use of other transactions.

The FY 2017 NDAA mandated a change to the DFARS to require that the lowest price technically acceptable (LPTA) source selection criteria can be used only in certain limited circumstances in which six factors are fulfilled, and must be avoided for certain types of acquisitions. This provision was later modified by the 2018 NDAA, adding two additional factors to the DFARS criteria for LPTA. Section 880 of the FY 2019 NDAA extends the original six factors, which drastically restrict an agency’s ability to use the LPTA criteria, to the civilian agencies.

Under § 880, “It shall be the policy of the United States Government to avoid using lowest price technically acceptable source selection criteria in circumstances that would deny the Government the benefits of cost and technical tradeoffs in the source selection process.” This section requires new revisions to the Federal Acquisition Regulation (FAR) within 120 days to adopt the six criteria limiting LPTA use government-wide, and to adopt for civilian agencies the provisions for avoidance of LPTA criteria in certain types of procurements.

Permanent Supply Chain Risk Management Authority (NDAA § 881)

Section 881 permanently extends the authority concerning DoD’s management of supply chain risk in covered procurements, including national security systems and related information technology (authority provided first by the FY 2011 NDAA). This provision preserves the authority of the Secretaries of Defense, Army, Navy and Air Force to exclude certain sources based on considerations of supply chain risk through a “covered procurement action,” and to limit the disclosure of information relating to the basis for carrying out such a covered procurement action.

Covered procurement actions are based on a joint recommendation by the Under Secretary of Defense for Acquisition and Sustainment and the DoD Chief Information Officer, on the basis of a risk assessment by the Under Secretary of Defense for Intelligence, that there is a significant supply chain risk to a covered system. This section also provides that when the agency head has exercised the authority to limit disclosure of information, no action under this authority can be subject to review in a bid protest before the GAO or in any federal court.

Review of Market Research (NDAA § 882)

According to the conference report, this provision is intended to “improve DoD’s capacity to conduct market research by diversifying the sources and methods used.” Not later than February 1, 2019, the Under Secretary of Defense for Acquisition and Sustainment, in consultation with the Under Secretary of Defense for Research and Engineering, must review the DoD guidance with regard to provisions of the Federal Acquisition Regulation regarding commercially available market research and market research practices.

Process to Limit Foreign Access to Technology (NDAA § 885)

Under this section, the Secretary of Defense must develop “a process and procedures for limiting foreign access to technology through contracts, grants, cooperative agreements, or other transactions, when such limitation is in the interest of national security.” The Secretary must submit a report to Congress no later than September 1, 2019, on the process and procedures developed, which must be consistent with existing law, including laws relating to trade agreements, individual protections, export controls and the National Technology and Industrial Base (NTIB).

This section prohibits executive agencies from procuring certain covered telecommunications equipment or services (with effective dates one or two years after the NDAA’s enactment). Covered telecommunications equipment or services include those provided by certain designated companies, or by an entity that the Secretary of Defense, in consultation with the Director of the National Intelligence or the Director of the Federal Bureau of Investigation, reasonably believes is owned or controlled, or otherwise connected to, the government of a covered foreign country (currently limited to the People’s Republic of China).

This provision reflects interest by Congress and DoD in reducing regulatory requirements associated with cost or pricing data. The Secretary of Defense must establish a pilot program to reform and accelerate the contracting and pricing processes associated with contracts in excess of $50 million. Under the pilot program, DoD will (1) base price reasonableness determinations on actual cost or pricing data for purchases of the same or similar products for the DoD; and (2) reduce the cost or pricing data required to be submitted under existing law. The program may include no more than 10 contracts, and none may be part of a major defense acquisition. The Secretary must submit a report to Congress no later than January 30, 2021, with an assessment of whether the program should be continued or expanded.

Conclusion

The NDAA’s procurement law reforms cover a diverse array of subjects, including reforms to commercial item laws and a reorganization of the U.S. Code (covered in our prior update), which will produce regulatory simplification over time. The provisions discussed above are generally intended to improve procurement laws and the efficiency of the procurement system, and/or to provide further information to Congress in support of future reforms.

In Title VIII, Congress has also provided increased attention to promoting opportunities for small businesses, enhancing the DoD industrial base, and countering risks from foreign nations. Title VIII covers additional subjects, including subtitles relating to technical data and to major defense acquisition programs. The NDAA also includes major procurement reforms and related provisions outside Title VIII, including provisions relating to space and cyberspace (Title XVI) and provisions intended to limit foreign access to U.S. technology (Title XVII).

In the greater context, the NDAA boosts national investments in defense technologies and capabilities in air, land, sea, space and cyberspace, and signals continued congressional support for improvements to procurement laws, in support of increased defense readiness and continued improvements to U.S. national security.

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